Tax Analysts Blog

Achieving a Soft Landing on State Aid

Posted on Sep 28, 2016

The two-year battle between the United States and the European Commission over the latter’s state aid investigations harkens back to legendary boxing matches, like the 1975 “Thrilla in Manila” between Joe Frazier and Muhammad Ali. During their third and final match, the two heavyweights slugged it out until Frazier’s corner threw in the towel before the start of the 15th round. Ali won a technical knockout, but both fighters emerged battered and bruised. 

If the present trajectory of the state aid investigations continues on its predictable course, it is easy to visualize the U.S. and the commission as the exhausted Frazier and Ali at the end of their epic battle. But in the world of tax and trade policy – not to mention international relations – it is not a good outcome if a dispute between trading partners and allies reduces both sides to a bloody pulp. 

There must be a way for the many parties with an interest in the outcome of the state aid cases to avoid that lose-lose outcome. All it requires is for governments on both sides of the Atlantic to lose their hubris, grow some humility, and realize that there can be a soft landing in which everyone gains and, more importantly, everyone can move forward.

What kind of a result might follow if the commission and the U.S. decided they would rather stop fighting, reach agreement, declare mutual victory, and go home? A thoughtfully crafted settlement would acknowledge a few key considerations:

        1.  The EU has an interest in making sure that member states do not provide selective tax subsidies that distort competition in the single market.
        2.  The U.S. has an interest in making sure that other nations – and alliances of nations – treat its corporate taxpayers fairly, and that its tax dollars do not flow directly or indirectly into the treasuries of other countries.
        3.  Multinational enterprises and the tax administrations of EU member states have an interest in providing certainty through the process of issuing tax rulings that both taxpayers and governments can rely on.

The interested parties can and should reach a negotiated solution that respects each of these considerations, provides predictability in the future, and ends the dispute promptly, avoiding a drawn-out court process whose result is far from certain. 
What might a negotiated resolution look like? The details would have to be worked out. But a framework could include the following non-exhaustive list:

        1. The MNEs that negotiated the challenged rulings would pay amounts to be determined – but less than the amounts ordered by the commission – with  the money going not to the countries that issued the rulings, but into a fund to be administered by the EU, as already proposed in Europe.
        2. To the extent they may still be in force, the challenged rulings would be abrogated, effective prospectively only.
        3. The commission would acknowledge that member states may rely on the OECD transfer pricing guidelines in issuing future tax rulings.
        4.  Finally, the commission would set up a special office, staffed by tax and trade professionals, so that member states can obtain a prompt advance determination on whether a proposed tax ruling may violate state aid rules.

I don’t claim to have all the answers, or even any of them. But until the affected parties sit down and think about how they might resolve this dispute, they are destined to slug it out for the next five years, until one side finally throws in the towel. That might have worked for Frazier and Ali – but it will not work for the world’s economy, or for relations between the EU and the U.S.

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Read Comments (1)

Mike55Sep 29, 2016

Interesting article. I'm not so sure compromise is the right answer from a U.S. perspective though. To draw a hasty analogy to poker: folding in the face of an aggressive bet may be the right move the vast majority of the time, but if you're that guy who ALWAYS folds, you can rest assured your chips will eventually disappear. Sometimes you need to make a tough call or two just to ensure your fellow gamblers perceive risk associated with trying to "buy the pot" away from you.

This is not to say the U.S. should take the Trumpian path of starting trade wars all over the globe in response to every perceived slight, but rather that every so often we must selectively choose a battle. The EU state aid rulings strike me as an appropriate opportunity to do so: the state aid tax saga is a very aggressive application of the law, which is not fully supported within the EU itself.

In other words I'm sensing a bluff here and think the U.S. ought to call it. I'm quickly getting the sense that the Obama Administration agrees... their public comments have become increasingly aggressive, which is no accident.* This is also a rare case where all major political players are aligned: when President Obama and Chairman Brady actually agree on a tax related subject, there's not going to be a whole lot of room for debate. The Levin's of the world can preach moderation, but the end result is preordained. So sadly I think your boxing match will need to go to the end, regardless of the damage done to the combatants.

*Regardless of what one might think of the current Administration as a whole, there is no denying its skill at consistent, polished messaging up and down the ranks. High ranking officials rarely make "off-message" public comments; everyone is on the same page, all the time.

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